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Monday, September 6, 2010

The Making Of A Market Guru: 1986 - 1987

Ken Fisher manages $35 billion in individual and institutional funds and is value-focused. His father wrote a terrific investment book discussed here, but this book is about Ken's investment philosophy, which evolved over his career. This book chronicles that value-focused evolution over his 25 years as a Forbes columnist.

Fisher likens professors of finance to witch doctors because of the absurd way in which they (and now the finance industry in general) believe beta to be the measure of a stock's risk. Fisher does not believe that volatility equals risk, and cites research showing that beta as a measure of risk is flawed.

As the stock market continues its rise through most of this time period (culminating in the crash in October of 1987), Fisher warns that the market appears overvalued. Nevertheless, he advises readers not to try to time the market, but instead to continue to buy undervalued stocks. To avoid being too invested in an overvalued market, however, Fisher recommends having a maximum percentage (e.g. 5%) in one's portfolio spent on any one stock. As such, if the market becomes overvalued, the investor will not be fully invested as there will be a shortage of undervalued stocks to fill the portfolio.

During that time period, investors appeared to be concerned with the federal deficit. Fisher makes an interesting point that government accounting and corporate accounting is very different, making deficits seems worse than they are. When a corporation acquires an asset (e.g. a building or equipment), it capitalizes it and depreciates the expense over several years in the future. The government, however, expenses its acquisitions (even in the case of land!) right away, making deficits seem larger than they are, since in actuality there are assets present.

Just one month before the big crash in October, Fisher suggests that a bear market is coming, even though he can't predict when. Market P/E's were too high (20), and interest rates were rising, suggesting there was a shortage of liquidity. Following the crash, Fisher shared his thoughts on how it felt to have been invested during that week in October, and how his firm reacted to the market shocks.